Delinking the dirham from the dollar is currently ruled out

[sameerl]

Inflation is casued by many factors. Amongst others, it is capacity based, excess monetary based, labor based, etc. In Dubai, (non-rental) inflation is based primarily on the dollar depreciation, because Dubai imports almost all of its products. Everything from vegetables to fruit, to meat to utensils, etc are imported from countries like India, China, Japan, US, etc. Now the import currency of trade is primarily USD, and Euro. When these currencies depreciate, their counter currencies appreciate (Indian rupee being an example which has appreciated by more than 25% in 2 years). Now if the peg does not adjust, our imports of Indian goods rise by 25%, even though the indian rupee cost is the same (which it almost never is). Look at the press release again. Amongst measures taken to rein in inflation, the government is placing artificial price caps on cement, milk, agriculture, school fees, and even cinema ticket prices. This means that were it not for these caps, inflation would be much higher. So the amount of paperwork that the government is doing (just to maintain the peg) is so much more, by artificially controlling prices (and creating strong business disincentive effects). If it moved the peg, then it would not have to intervene in the daily markets for these basic commodities.

Now this cuts both ways. When the USD appreciates, in Dubai, inflation will fall. The argument is not that we should wait for the USD to appreciate (and many experts believe that this may happen). The argument is that if you move to a floating currency (or an adjustble peg), then price distortions in the domestic economy are much lower. You do not have to resort to artificial measures to curb inflation, which is occuriing due to no glitch in the economy. Rental prices are rising because there is a current shortage of apartments and villas. But food prices are rising not because there is a shortage or because the cost of raw materials have gone up, but almost solely because the USD is depreciating. An adjustable peg allows prices to move based on domestic matters. A fixed peg leads to price movements based on events beyond your borders (hence the term imported inflation).

My apologies for such a long winded and boring post. Like i said, we agree to disagree.

[glover]

let's cut to the chase! in all honestly, if the government here did everything you thought is right to curb inflation, how much do you think inflation will be in the UAE in a double digit growth environment, 5, 6, 7, 8 !!!!

[glover]

arabianbusiness.com
by Dylan Bowman on Wednesday, 20 June 2007

The UAE's inflation rate rose by a third last year, driven by the rising cost of accommodation, according to government statistics released on Wednesday.

Last year's inflation rate stood at 9.3%, up from 6.2% in 2005, but not as high as previous estimates of 10%.

The Consumer Price Index, on which the level of inflation is measured, increased to 133.0 points, up from 121.7 in 2005.

The greatest rise in living expenses was seen in the 'House Rent & Related House Items’ category.

Housing costs rose by 15.3% last year, up from 9.4% in 2005, and now represent 36.1% of all expenses for a family living in the UAE, according to official statistics.

The price of transportation and communication also saw a marked increase last year, with a rise of 9.5% compared with 4.6% the year before.

Official figures show transportation and communication costs formed almost 15% of a family’s expenses in 2006.

The rate of price increases was higher in five of the eight groups that make up the Consumer Price Index.

‘Food, Beverages & Tobacco’, ‘Clothes, Textile & Footwear’ and ‘Other Goods and Services’ all experienced small increases, while ‘Furniture & Related Items’, ‘Medical Care & Health Services’ and ‘Recreational, Education’ saw a minor drop in inflation.

Sheikha Lubna Al-Qasimi, UAE Minister of Economy, said a 31.5% increase in the price of fuel products in 2005 led to an increase in production prices, which eventually elevated and directly affected the UAE’s inflation rate.

Other reasons behind the increase in the price of goods and services was the rise in demand for real estate caused by the country’s economic growth, she added.

Sheikha Lubna said the weak US dollar also affected the price of products and services, due to its impact on UAE exports.

The minister assured that the Ministry of Economy was working to reduce inflation growth through mechanisms such as the consumer protection unit, formed last year, which she said has succeeded in reducing the cost of some goods.

The UAE government is keen to lower inflation as it tries to maintain its current level of economic growth.

If inflation levels do not drop there is the danger that soaring cost of living will deter workers from living in the Emirates, which could cause damage to the country’s economy.

-------------------------------------
note that housing cost represents 36.1% of all expenses for a family living in the UAE, while transportation and communication costs formed almost 15%. Together, they represent about 50% of a family’s expenses in 2006.

[glover]

arabianbusiness.com
by Dylan Bowman and Reuters on Sunday, 24 June 2007

The UAE has not ruled out dropping its currency’s peg to the dollar, but would only do so with the support of other GCC nations, the country’s central bank governor said today.

“For the UAE I can say comfortably and surely that we will not move alone and we will move with other GCC countries,” Sultan Nasser Al-Suweidi told reporters, speaking on the sidelines of the annual meeting of the Bank for International Settlements in Switzerland.

“We will all be together in it. No we are not ruling out, but we will have to move together,” he added.

Al-Suweidi’s comments are the clearest indication yet that the UAE would consider dropping the dirham’s dollar peg.

Previously Al-Suweidi has said the UAE is “committed” to keeping its currency pegged to the dollar at a fixed rate.

Jordan, however, categorically ruled out dropping its currency’s peg to the dollar on Saturday, with central bank governor Umayya Toukan stating it was “not for discussion”.

If fact, Toukan said Jordan may actually buy more of the US currency to help take pressure off the dinar.

“There may come a time when we will intervene in the market to take some upward pressure off our currency by buying dollars with dinars,” he added.

Toukan has previously blamed the weak dollar, along with higher fuel costs, for rising inflation in the country.

However, he said inflation would return to normal levels of between 3-4% in the “medium term”, from around 5% this year, and foresaw no currency problems on the horizon.

Central bank governors across the Middle East, where many countries have their currencies pegged to the dollar, have been under pressure to revalue this position following Kuwait’s and then Syria’s decision to drop their currencies’ dollar peg in favour of a basket of currencies.

The weakening of the dollar against other international currencies over the last year has seen the cost of imports denominated in currencies such as the euro rise significantly.

This has had a negative impact on inflation and has limited countries’ ability to cool their economies because their commitment to the dollar peg restricts their ability to raise interest rates out of step with the US Federal Reserve.

Suweidi said that countries in the GCC - where price stability has suffered as a result of the weak dollar - did not face a permanent inflation problem, but did have bottlenecks in real estate that were likely to be temporary.

He also said that the Gulf monetary union, which has been thrown into doubt by Kuwait’s decision to drop the dollar peg, would come in stages and the unified currency will come after the GCC sees the common market was working to the group's satisfaction.

[rexdmx]

omigosh! sorry boys missed this thread in a while...
go on
dont stop now!

[rexdmx]

Gulf to collectively act on dollar peg
Reuters
Published: June 24, 2007, 23:30


Basel: The UAE will not drop its currency peg to the US dollar without other Gulf nations doing the same, the country's central bank governor said yesterday.

Six countries in the GCC are planning a single currency by 2010. However, this deadline is in doubt after Oman said it would not meet the target.

The GCC countries had agreed to keep their currencies pegged to the dollar in the run-up to 2010. But markets have been betting the dollar's decline would tempt some Gulf states to change dollar-pegged exchange rates, especially after Kuwait broke ranks and adopted a currency basket in May.


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"Give me a certificate, I will sign it. For the UAE I can say comfortably and surely that we will not move alone and we will move with other GCC countries. We will all be together in it. No, we are not ruling out, but we will have to move together," Central Bank Governor Sultan Bin Nasser Al Suwaidi said.

"We meet regularly and we discuss these issues. These are monetary and exchange rate policies and if we decide that exchange rate policies need that we move to a basket... we will do that," he told reporters.

He added that the monetary union will come in three stages and the unified currency will come after the GCC sees the common market was working to the group's satisfaction, hinting that the 2010 GCC deadline for the single currency might be delayed.

"Our monetary union consists of three stages, but they don't need to be implemented at the same time. Stage one, two will be completed by 2010 and stage three will be a unified currency... we will defer it until we have a common market working to our satisfaction."

Suwaidi later said the GCC was between the first stage -- "getting capital flows right", and the second phase -- working towards a common market and adjusting policy.

He was speaking on the sidelines of a gathering of the world's central bankers at the Bank for International Settlements in Basel.

A Reuters poll in March tipped the UAE as the country most likely to revalue its currency after Kuwait to cope with the fallout from the dollar's fall.

[glover]

Gulf News
By Shakir Husain, Staff Reporter
Published: June 27, 2007, 23:33

Dubai: Residents of the UAE are unlikely to get a respite from high consumer prices as imports grow increasingly expensive and a shortage of housing continues to push rents upward.

Manufacturers and suppliers in various sectors, ranging from food to petroleum, want to raise prices of goods and services.

The Ministry of Economy this week agreed to a 20 per cent rise in the price of rice, half of what importers want due to high prices in top rice producing countries India and Pakistan.

The price of diesel rose last week by up to 40 fils at local filling stations.

The ministry has tried to contain inflation by imposing ceilings on price hikes but those measures have failed to prove effective. "Price controls can only be a short-term measure. In the end, you have to look to the market to set prices," said Simon Williams, an economist with HSBC in Dubai.

"There are pressures on imported food as commodity prices are picking up globally. You can see these pressures playing out across the Gulf," he said.

Delays

Delays in Dubai property projects raised the average rent for apartments by as much as 18 per cent in the first quarter, property services firm Asteco said.

It said only 14,000 housing units came onto Dubai's market last year, 26,000 less than expected.

HSBC put inflation in the UAE at 10.5 per cent in 2006, while investment bank EFG Hermes estimated it at 7.7 per cent to 10 per cent.

The Ministry of Economy said inflation was 9.3 per cent last year, with the fuel price rise of 31.5 per cent in 2005 and rents rising by an average 15.3 per cent.

The International Monetary Fund estimates inflation in the UAE to be much higher.

The dirham's peg with the US dollar, which is falling in value against major currencies, is also contributing to imported inflation.

"Interest rates should be higher because there liquidity is high the region. But they remain lower than required because the UAE monetary policy is tied to the US Federal Reserve," said Monica Malik, senior economist with EFG Hermes.

High growth rate leads to price pressures

Simon Williams, an economist with HSBC in Dubai, said UAE inflation is primarily driven by the very rapid pace of economic growth.

"UAE GDP has more than doubled in the past four years and trebled in the last eight. You don't grow that fast for that long without experiencing price pressures," he added.

[AltinD]

The usual story: no we don't ... yes we will ... no I never said that ... yes we might ... no we will not ... maybe latter ... no never ... who said that ... what, when ...

[glover]

did you actually read the whole thing, or did you do some speed reading/scanning!!

[AltinD]

Yes I did read and it is exactly how I said.

[glover]

honestly, when i read your comment i thought you were talking about something else. i see the story completely different from how you see it. am sure you can live with that!

[AltinD]

Maybe you're talking about the story ... I'm talking about the stories (plural).

Come on now, don't tell me that since this matter came out we haven't heard different and often contradictory reports and statements from people in charge of the finances. What is so difficult, why it has everything to be turned into an argument to be won regardless on what it is or if it is right or wrong ...

[glover]

really, the last thing i want to do is to have an online argument with some virtual unknown person to me. but i have to say, i just don't appreciate your sense of cynicism (which i also pick from others on this board, especially people from europe).

i do see these stories differently than you do! again, i am sure you can live with that

[AltinD]

When you'll stop quoting articles and actually read them ...

[nasim50]

Is there any exchange rate analysts here???

What do you predict the future strength of the dirham will be compared to the pound looking at the back end of 2008 and beyond.

Great time to buy dirhams 7.3AED: £1 but will it fall back nearer to 6AED: £1 in the months and years.

Which would be great!!!!!

for me anyway!!!!!

[romaforever]

Too much risks nasim50. One thing is real estate in Dubai, one thing is playing with the currencies.

[nasim50]

The way i see it is that at the moment the dollar is probably at its weakest position against the pound ie $2:£1, it has'nt been like this for a long long time. In the coming months i think the dollar will regain it strength going back to positions like $1.8: £1 and as a result the diraham will get stronger against the pound.

Looking in future years the dirham will drop the dollar like a bad habit and go for the single currency when all the other GCC countries smarten up and get with the times.

I've heard when that does happen in the next couple of years and a new currency is formed, investors of UAE properties will have a proper windfall as their properties would have risen 10% purely on the change of exchange rate and not a move in the property market.

And i'll tell you one thing no way is there going to be a price correction on dubai properties by the government. The Market is strong and will get stronger, i bet in around 10 years time the market will be similar to the Hong Kong market.

And then will be saying yea baby yea

Thats how i see it though, hope it happens.

[rexdmx]

read the article by gulf news on the 30th of july 2007
seriously nasim50..this is quite volatile...dont go into anything if you dont know.




Many lose huge sums but money market operators still post hefty gains in fees.



Currency traders leave investors weeping
By Ivan Gale, Staff Reporter
Last updated: June 30, 2007, 00:30


Dubai: Last summer, Ghasem Sajedinya signed over $70,000 to a trader at Royal Index to buy and sell foreign currency on the open market. A week later, it was nearly all gone.

The trader made dozens of unsuccessful trades, wiping out over $60,000 from the initial sum. $1,000 was left in the account, while commission fees ate up $7,400.

In many ways, Sajedinya's story isn't unique - just another poor soul who bet big on the market, risked it all and lost.

But the size of the commissions, and the way his trader made such disastrous trades, belies a disturbing fact. In the UAE, anybody can take a few classes at a trading firm like Royal Index and begin trading other people's money.

They do so in highly speculative markets, and make money through commissions whether they win or lose their investors' money.


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Jaafar Yousuf, general manager of Royal Index, acknowledges they make money through the commissions of their graduates, but denies that they mislead investors.

"We recruit people, and then we give them know-how," he said. "We always say forex is very, very risky." Sajedinya confirmed he was told of the risks beforehand.

Sajedinya first learned about currency trading soon after moving here from Iran with his family. Someone told him he could reap 10 per cent profits each month through the trades and referred him to Royal Index.

There, he was taught the basics of trading euros and gold on world markets. Then they introduced him to a trader who said he could make his money grow.

He transferred the funds - his entire savings, he says - to Royal Index, which moved the money to World Index Investment, which operates a currency-trading platform. A foreign company, World Index is not related to Royal Index, Yousuf said.

The trader then began a flurry of trades that Sajedinya said he hadn't expected or authorised. Sajedinya wanted to sue, but he was advised he wouldn't win, as he had signed a contract.

Model

Royal Index's business model is to train men and women in the basics of trading currencies and gold. Typically, trainees spend a week learning the fundamentals, Yousuf said.

Then, the traders persuade others to put up money for forex trading. The charge per trade is $120, and Yousuf said $30 goes to the trader as a "rebate." In contrast, trading fees of around $20 are charged at established brokerages in the West.

Currency trading is risky because trades are done on margin. Instead of buying euros outright, a trader will spend a few thousand dollars buying the right to trade one 'lot' of 100,000 euros, according to Forextips.com.

A small swing - a .005 gain, for example - multiplied by 100,000 euros can earn a trader a handsome profit. A slight dip and a margin trader's account can be devastated.

"No one can make money from currency trading. If someone does, he'll make it only to lose all of that later and then something more," said Prabhakar Kamal, a financial analyst at Morrison Menon financial accountants.

Firms like Royal Index were a topic of concern at a website called the UAE Securities market forum. "I've met so many people that know nothing about it all. They just take new accounts and go to sleep," wrote someone called 'Al Ain Forever'.

Yousuf acknowledges that investors have sustained losses after trading at Royal Index. Many have even sought legal action. Every time, "at least in the UAE," the court has sided with Royal Index, he said.

"We're not doing anything wrong here," he said. "We are inspected by the Central Bank and want to protect our reputation."

[Morrismarina]

Interesting post, I was advised to fix my Dirham rate at 6.43 last year April '06 - proves these currency traders know jack shit !!

[rexdmx]

you are so right there!!!
there are no real trained money managers in this place...only speculators and they play with people's life savings...although you can't blame them, after all they did write in their footnotes that there is a possibility of losing money

i suggest you dont buy on margin
only if u r truly passionate about it then you go for training and practice with the smallest sums...
study economics and accounting...

Originally Posted by Morrismarina

Interesting post, I was advised to fix my Dirham rate at 6.43 last year April '06 - proves these currency traders know jack shit !!